Corporate Restructuring

(Hons. 2)
CLCP 4001
7 Semester
th

PROF. SURYA SAXENA

 Introduction
There are primarily two ways of growth of business
organization, i.e., organic and inorganic growth.
Organic growth is through internal strategies, which may relate
to business or financial restructuring within the organization that
results in enhanced customer base, higher sales, increased
revenue, without resulting in change of corporate entity.
Inorganic growth provides an organization with an avenue for
attaining accelerated growth enabling it to skip few steps on the
growth ladder.
Restructuring through mergers, amalgamations etc constitute one
of the most important methods for securing inorganic growth.
TRIVIA –
Growth can be organic or inorganic.
A company is said to be growing organically when the growth is
through the internal sources without change in the corporate entity.
Organic growth can be through capital restructuring or business
restructuring.
Inorganic growth is the rate of growth of business by increasing
output and business reach by acquiring new businesses by way of
mergers, acquisitions and take-overs and other corporate
restructuring Strategies that may create a change in the corporate
entity.
The business environment is rapidly changing with respect to
technology, competition, products, people, geographical area, markets,
customers.
It is not enough if companies keep pace with these changes but are
expected to beat competition and innovate in order to continuously
maximize shareholder value.
Inorganic growth strategies like mergers, acquisitions, takeovers and
spinoffs are regarded as important engines that help companies to enter
new markets, expand customer base, cut competition, consolidate and
grow in size quickly, employ new technology with respect to products,
people and processes.
Thus, the inorganic growth strategies are regarded as fast track
corporate restructuring strategies for growth.
 Meaning of Corporate
Restructuring
Restructuring as per Oxford dictionary means “to
give a new structure to, rebuild or rearrange".
As per Collins English dictionary, meaning of
corporate restructuring is a change in the business
strategy of an organization resulting in
diversification, closing parts of the business, etc, to
increase its long-term profitability.
Corporate restructuring is defined as the process involved
in changing the organization of a business. Corporate
restructuring can involve making dramatic changes to a
business by cutting out or merging departments.
It implies rearranging the business for increased efficiency
and profitability.
In other words, it is a comprehensive process, by which a
company can consolidate its business operations and
strengthen its position for achieving corporate objectives-
synergies and continuing as competitive and successful
entity.
 Corporate Restructuring as a
Business Strategy
Corporate restructuring is the process of significantly
changing a company's business model, management team or
financial structure to address challenges and increase
shareholder value.
Restructuring may involve major layoffs or bankruptcy,
though restructuring is usually designed to minimize the
impact on employees, if possible.
Restructuring may involve the company's sale or a merger
with another company.
Companies use restructuring as a business strategy to ensure
their long-term viability.
Shareholders or creditors might force a restructuring if
they observe the company's current business strategies as
insufficient to prevent a loss on their investments.
The nature of these threats can vary, but common catalysts
for restructuring involve a loss of market share, the
reduction of profit margins or declines in the power of
their corporate brand.
Other motivators of restructuring include the inability to
retain talented professionals and major changes to the
marketplace that directly impact the corporation's business
model.
TRIVIA –
Corporate restructuring is the process of
significantly changing a company's business model,
management team or financial structure to address
challenges and increase shareholder value.
Corporate restructuring is an inorganic growth
strategy.
 Benefits of Corporate
Restructuring
Mergers, amalgamations and acquisitions are forms of
inorganic growth strategy. Such corporate restructuring
strategies have one common goal viz. to create synergy.
Such synergy effect makes the value of the combined
companies greater than the sum of the two parts.
Basically, synergy may be in the form of increased revenues
and/or cost savings.
Corporate Restructuring aims at improving the competitive
position of an individual business and maximizing its
contribution to corporate objectives.
Through mergers and acquisitions, companies hope to benefit from the
following:
(1) Increase in Market Share – Merger facilitates increase in market share
of the merged company. Such rise in market share is achieved by providing
an additional goods and services as needed by clients. Horizontal merger is
the key to increasing market share. (E.g., Idea and Vodafone)
(2) Reduced Competition – Horizontal merger results in reduction in
competition. Competition is one of the most common and strong reasons
for mergers and acquisitions. (HP and Compaq)
(3) Large size – Companies use mergers and acquisitions to grow in size
and become a dominant force, as compared to its competitors. Generally,
organic growth strategy takes years to achieve large size. However, mergers
and acquisitions (i.e., inorganic growth) can achieve this within few
months. (E.g., Sun Pharmaceutical and Ranbaxy Pharmaceutical)
(4) Economies of scale – Mergers result in enhanced economies of
scale, due to which there is reduction in cost per unit. An increase
in total output of a product reduces the fixed cost per unit.
(5) Tax benefits – Companies also use mergers and amalgamations
for tax purposes. Especially, where there is merger between profit
making and loss-making company. Major income tax benefit arises
from set-off and carry forward provision u/s 72A of the Income-tax
Act, 1961.
(6) New Technology – Companies need to focus on technological
developments and their business applications. Acquisition of
smaller companies helps enterprises to control unique technologies
and develop a competitive edge. (E.g., Dell and EMC)
(7) Strong brand – Creation of a brand is a long process; hence
companies prefer to acquire an established brand and capitalize
on it to earn huge profits. (E.g., Tata Motors and Jaguar)
(8) Domination – Companies engage in mergers and acquisitions
to become a dominant player or market leader in their respective
sector. However, such dominance shall be subject to regulations
of the Competition Act, 2002. (E.g., Oracle and I-Flex
Technologies)
(9) Diversification – Amalgamation with companies involved
into unrelated business areas leads to diversification. It facilitates
the smoothening of business cycles effect on the company due to
multiplicity of businesses, thereby reducing risk. (E.g., Reliance
Industries & Network TV18)
(10) Revival of Sick Company – Today, the Insolvency and
Bankruptcy Code, 2016 has created additional avenue of
acquisition through the Corporate Insolvency Resolution
Process.
Notable mergers/demergers/acquisitions that took place are
Myntra acquiring Jabong, RIL acquiring Network TV18,
Sun Pharma absorbing Ranbaxy; Wirpo demerger, Reliance
Industries demerger.
 Need and Scope of
Corporate Restructuring
Corporate Restructuring is concerned with arranging the business
activities of the corporate as a whole so as to achieve certain
predetermined objectives at corporate level.
Such objectives include the following:
— orderly redirection of the firm's activities;
— deploying surplus cash from one business to finance profitable
growth in another;
— exploiting inter-dependence among present or prospective
businesses within the corporate portfolio;
— risk reduction; and
— development of core competencies.
When we say corporate level, it may mean a single
company engaged in single activity or an enterprise
engaged in multi activities.
It could also mean a group having many companies
engaged in related or unrelated activities.
When such enterprises consider an exercise for
restructuring their activities, they have to take a
wholesome view of the entire activities so as to
introduce a scheme of restructuring at all levels.
However, such a scheme could be introduced and
implemented in a phased manner.
Corporate Restructuring also aims at improving the
competitive position of an individual business and
maximizing its contribution to corporate objectives.
It also aims at exploiting the strategic assets accumulated
by a business i.e., natural monopolies, goodwill,
exclusivity through licensing etc. to enhance the
competitive advantages.
Thus, restructuring would help bringing an edge over
competitors.
Competition drives technological development.
Competition from within a country is different from cross-
country competition.
Innovations and inventions do not take place merely
because human beings would like to be creative or simply
because human beings tend to get bored with existing
facilities.
Innovations and inventions do happen out of necessity to
meet the challenges of competition. Cost cutting and value
addition are two mantras that get highlighted in a highly
competitive world.
Monies flow into the stream of production in order to be able to
face competition and deliver the best possible goods at the
convenience and affordability of the consumers.
Global Competition drives people to think big and it makes them
fit to face global challenges. In other words, global competition
drives enterprises and entrepreneurs to become fit globally.
Thus, competitive forces play an important role. In order to
become a competitive force, Corporate Restructuring exercise
could be taken up.
Also, in order to drive competitive forces, Corporate
Restructuring exercise could be taken up.
The scope of Corporate Restructuring encompasses
enhancing economy (cost reduction) and improving
efficiency (profitability).
When a company wants to grow or survive in a
competitive environment, it needs to restructure
itself and focus on its competitive advantage.
The survival and growth of companies in this
environment depends on their ability to pool all
their resources and put them to optimum use
A larger company, resulting from merger of smaller
ones, can achieve economies of scale.
If the size is bigger, it enjoys a higher corporate status.
The status allows it to leverage the same to its own
advantage by being able to raise larger funds at lower
costs.
Reducing the cost of capital translates into profits.
Availability of funds allows the enterprise to grow in all
levels and thereby become more and more competitive.
Corporate Restructuring …..an Example
ABC Limited has surplus funds but it is not able to
consider any viable projects. Whereas XYZ Limited
has identified viable projects but has no money to
fund the cost of the project. The merger of ABC
LTD and XYZ Limited is a mutually beneficial
option and would result in positive synergies of
both the Companies.
Corporate Restructuring aims at different things at different times for
different companies and the single common objective in every
restructuring exercise is to eliminate the disadvantages and combine
the advantages.
The various needs for undertaking a Corporate Restructuring exercise
are as follows:
(i) to focus on core strengths, operational synergy and efficient
allocation of managerial capabilities and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion
to exploit extended domestic and global markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the
sick unit with profits of a healthy company.
(iv) acquiring constant supply of raw materials and access to
scientific research and technological developments.
(v) capital restructuring by appropriate mix of loan and
equity funds to reduce the cost of servicing and improve
return on capital employed.
(vi) Improve corporate performance to bring it at par with
competitors by adopting the radical changes brought out by
information technology.
Motives Behind Corporate
Restructuring
Types of Restructuring
1. Financial Restructuring:
Financial restructuring deals with restructuring of capital
base and raising finance for new projects. Financial
restructuring helps a firm to revive from the situation of
financial distress without going into liquidation. Financial
restructuring is done for various business reasons: • Poor
financial performance
• External competition
• Erosion or loss of market share
• Emerging market opportunities
2. Market and Technological Restructuring:
Market Restructuring involves decisions with respect to the
product market segments where the company plans to operate
on its core competencies and technological restructuring
occurs when a new technology is developed that changes the
way an industry operates.
This type of restructuring usually affects employees, and
tends to lead to new training initiatives, along with some
layoffs as the company improves efficiency.
This type of restructuring also involves alliances with third
parties that have technical knowledge or resources
Indian technology major Tata Consultancy Services Limited
has embarked upon the process of restructuring and focusing
on three core areas Cloud, agile and automation.
The restructuring plan of the company focuses on the
manufacturing capacity and on product, technical and
technological, financial, employment, organizational,
purchasing and management restructuring activities.
Joint Venture, Strategic Alliances, Franchising are some of
the examples of market and technological restructuring.
3. Organizational Restructuring:
Organizational Restructuring involves establishing internal
structures and procedures for improving the capability of the
personnel in the organization to respond to changes.
These changes need to have the cooperation of all levels of
employees.
Some companies shift organizational structure to expand
and create new departments to serve growing markets.
Other companies reorganize corporate structure to downsize
or eliminate departments to conserve overheads.
 Historical Background
The concept of merger and acquisition in India was not
popular until the year 1988.
During that period a very small percentage of businesses in
the country used to come together, mostly into a friendly
acquisition with a negotiated deal.
The key factor contributing to fewer companies involved in
the merger was the regulatory and prohibitory provisions of
MRTP Act, 1969.
According to this Act, a company or a firm has to follow a
burdensome procedure to get approval for merger and
acquisitions.
The year 1988 witnessed one of the oldest business
acquisitions or company mergers attempt in India.
Before 1991 Indian economy was closed economy.
Various licenses and registration under various enactments
were required to set-up an industry.
Due to restrictive government policies and rigid regulatory
framework, there existed very limited scope for
restructuring.
However, after 1991, the main thrust of Industrial Policy,
1991 was on relaxations in industrial licensing, foreign
investments, and transfer of foreign technology, etc.
With the economic liberalization, globalization and opening-
up of economies, the Indian corporate sector started
restructuring businesses to meet the opportunities and
challenges.
In the era of hyper competitive capitalism and technological
change, industrialists realized that restructuring perhaps is
the best route to reach a size comparable to global
companies so as to effectively compete.
 Planning, formulation and execution
of various restructuring strategies
Corporate restructuring strategies depends on the nature of business,
type of diversification required and results in profit maximization
through pooling of resources in effective manner, utilization of idle
resources, effective management of competition etc.,.
Planning the type of restructuring requires detailed business study,
expected business demand, available resources, utilized/idle portion
of resources, competitor analysis, environmental impact etc.,
The bottom line is that the right restructuring strategy provides
optimum synergy for the organizations involved in the restructuring
process.
It involves examination of various aspects before and after the
restructuring process.
 Various types of Corporate
Restructuring Strategies
These include:
1. Merger (Amalgamations and Acquisitions)
2. Demerger
3. Reverse Mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance
8. Slump Sale
9. Franchising
10. Business Sale/Divestiture
Merger –
Merger is the combination of two or more companies which
can be merged either by way of amalgamation or absorption.
The combining of two or more companies, is generally by
offering the stockholders of one company securities in the
acquiring company in exchange for the surrender of their
stock.
Mergers may be -
(i) Horizontal Merger: It is a merger of two or more
companies that compete in the same industry. It is a merger
with a direct competitor and hence expands as the firm's
operations in the same industry. Horizontal mergers are
designed to achieve economies of scale and result in reduce
the number of competitors in the industry. (Ex. Coca and
Pepsi).
Facebook's acquisition of Instagram in 2012 for a
reported $1 billion. Both Facebook and Instagram
operated in the same industry and were in similar
production stages in regard to their photo-sharing
services. Facebook, looking to strengthen its
position in the social media and social sharing
space, saw the acquisition of Instagram as an
opportunity to grow its market share, increase its
product line, reduce competition and access
potential new markets.
(ii) Vertical Merger: It is a merger which takes place upon the
combination of two companies which are operating in the same
industry but at different stages of production or distribution
system. If a company takes over its supplier/producers of raw
material, then it may result in backward integration of its
activities. On the other hand, Forward integration may result if a
company decides to take over the retailer or Customer Company.
Vertical merger provides a way for total integration to those firms
which are striving for owning of all phases of the production
schedule together with the marketing network. (Merger between
Zee Entertainment Enterprises Limited Ltd. (ZEEL), a
broadcaster, and Dish TV India Limited, a distribution platform
operator).
To illustrate, suppose XYZ Ltd. produces shoes and ABC
Ltd. produces leather. ABC has been XYZ's leather supplier
for many years, and they realize that by entering a merger
together, they could cut costs and increase profits. They
merge vertically because the leather produced by ABC is
used in XYZ's shoes.
(iii) Co generic Merger: It is the type of merger, where two
companies are in the same or related industries but do not
offer the same products, but related products and may share
similar distribution channels, providing synergies for the
merger. The potential benefit from these mergers is high
because these transactions offer opportunities to diversify
around a common case of strategic resources. (Example is
merger between Thomas Cook India Limited and Sterling
Holiday Resorts (India).
(iv) Conglomerate Merger: These mergers involve firms
engaged in unrelated type of activities i.e., the business of two
companies are not related to each other horizontally nor
vertically. In a pure conglomerate, there are no important
common factors between the companies in production,
marketing, research and development and technology.
Conglomerate mergers are merger of different kinds of
businesses under one flagship company. The purpose of merger
remains utilization of financial resources enlarged debt capacity
and synergy of managerial functions. It does not have direct
impact on acquisition of monopoly power and is thus favoured
throughout the world as a means of diversification. (Ex. Voltas
and L&T, Disney and Pixar)
Cash Merger -
In a ‘cash merger’, also known as a ‘cash-out
merger’, the shareholders of one entity receives
cash instead of shares in the merged entity. This is
effectively an exit for the cashed-out shareholders.
Demerger –
It is a form of corporate restructuring in which the entity's
business operations are segregated into one or more
components. A demerger is often done to help each of the
segments operate more smoothly, as they can focus on a
more specific task after demerge.
Demerger is an arrangement whereby some part/
undertaking of one company is transferred to another
company which operates separate from the original
company. Shareholders of the original company are usually
given an equivalent stake of ownership in the new company.
The contracts relating to the demerged undertaking would
get automatically transferred to the resulting company,
unless the underlying contract has stipulated specific
restrictions. A demerged company is said to be one whose
undertakings are transferred to the other company, and the
company to which the undertakings are transferred is called
the resulting company.
Example: Reliance Industries demerged to Reliance
Industries and Reliance Communications Ventures Ltd,
Reliance Energy Ventures Ltd, Reliance Capital Ventures
Ltd, Reliance Natural Resources Ltd.
Reverse Merger –
Reverse merger is the opportunity for the unlisted companies
to become public listed company, without opting for Initial
Public offer (IPO).In this process the private company acquires
the majority shares of public company, with its own name.
A reverse merger is a merger in which a private company
becomes a public company by acquiring it. It saves a private
company from the complicated process and expensive
compliance of becoming a public company. Instead, it acquires
a public company as an investment and converts itself into a
public company.
However, there is another angle to the concept of a reverse merger.
When a weaker or smaller company acquires a bigger company, it is a
reverse merger. In addition, when a parent company merges into its
subsidiary or a loss-making company acquires a profit-making company,
it is also termed as a reverse merger.
The reason for reverse merger are:
• To carry forward tax losses of the smaller firm, this allows the
combined entity to pay lower taxes. Tax savings under Income Tax Act,
1961.
• Economies of scale of production
• Marketing network
• To protect the trademark rights, license agreements, assets of small/loss
making company
Examples:
1. Merging of Oil exploration company Cairn India with
parent Vedanta India.
2. In 2002 Merging of ICICI with its arm ICICI Bank. The
parent company’s balance sheet was more than three times
the size of its subsidiary at the time. The rational for the
reverse merger was to create a universal bank that would
lend to both industry and retail borrowers.
Disinvestment –
Disinvestment means the action of an organization or government
selling or liquidating an asset or subsidiary. It is also known as
"divestiture".
Acquisition -
Acquisition occurs when one entity takes ownership of another
entity's stock, equity interests or assets. It is the purchase by one
company of controlling interest in the share capital of another
existing company. Even after the takeover, although there is a
change in the management of both the firms, companies retain their
separate legal identity. The companies remain independent and
separate; there is only a change in control of the companies. When
an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.
Some Examples:
• Snapdeal and Freecharge ($400 million)
• Flipkart and Myntra ($300 to 330 million)
• Ola and TaxiForSure ($200 million)
Joint Venture –
A joint venture is an entity formed by two or more companies to
undertake financial activity together. The parties agree to
contribute equity to form a new entity and share the revenues,
expenses, and control of the company. It may be Project based
joint venture or Functional based joint venture. (Or Horizontal or
Veritcal)
Project based Joint venture:
Under the Project-Based Joint Venture, the partners come together
to accomplish a fixed task. Since these collaborations are usually
done for an exclusive purpose, they stand cancelled once the
project is accomplished. These joint ventures exist for a particular
task, project, or time span.
Functional based Joint venture:
In the function-based joint venture, the parties form an
agreement to mutually benefit from the arrangement. This
agreement is in order that they gain from each other’s
expertise in different areas. This enables them to work
efficiently and effectively. Before entering an agreement, the
would-be partner companies ascertain whether they will be
able to function and perform efficiently together or not.
Vertical Joint Venture:
In this type of joint ventures, the transaction is between the
buyers and the suppliers. Not an economically viable option,
it is termed bilateral trading. In such a joint ventures,
different manufacturing stages of a single product are
integrated to create economies of scale that reduce the per-
unit cost of the finished product. Usually, this category of
joint venture proves to be very successful. The relationship
between the buyer and supplier also remains good. The
business prospers, and quality products reach consumers at a
reasonable price.
Horizontal Joint Venture:
In this venture, companies dealing in/ selling similar
products and direct competitors in the market join hands to
create an output that can be reached to customers of either
party. In this JV, disputes often arise because both
companies are dealing in identical/ similar businesses. The
parties also face opportunistic behavior from each other. The
gains from this alliance are shared according to the
agreement by the parties. Such ventures are not very
satisfying as, despite the cooperation, a feeling of
resentment stays.
Examples:
Vistara airlines is an Indian Joint Venture with a foreign
company. Vistara is the brand name of Tata SIA Airlines Ltd,
a JV between India’s corporate giant Tata Sons and
Singapore Airlines (SIA).
Tata Starbucks Pvt. Ltd is a joint venture of Tata with
Starbucks Corporation, USA which runs a chain of
Starbucks brand coffee shops across India.
Strategic Alliance –
Any agreement between two or more parties to collaborate
with each other, in order to achieve certain objectives while
continuing to remain independent organizations is called
strategic alliance.
Example: Uber’s partnership with Spotify lets Uber riders
easily stream their Spotify playlists whenever they take a
ride. This makes the Uber experience feel more personalized
and encourages Uber riders to subscribe to Spotify Premium
(for more control of their tunes both inside and outside
Uber).
Uber’s rivals don’t have a similar personalized music
experience, so this gives the rideshare giant a competitive
advantage over Lyft and other similar services. And since
not all Uber riders have Spotify, and not all Spotify users
ride with Uber, both brands gain access to new, broad
audiences in this business alliance.
Franchising –
Franchising may be defined as an arrangement where one
party (franchiser) grants another party (franchisee) the right
to use trade name as well as certain business systems and
process, to produce and market goods or services according
to certain specifications.
The franchisee usually pays a one-time franchisee fee plus a
percentage of sales revenue as royalty and gains.
Example: McDonalds.
Slump Sale –
Slump sale means the transfer of one or more undertaking as
a result of the sale of lump sum consideration without values
being assigned to the individual assets and liabilities in such
sales. If a company sells or disposes of the whole or
substantially the whole of its undertaking for a
predetermined lump sum consideration, then it results in a
slump sale.
The main reasons of slump sale are generally undertaken in
India due to following reasons:
• It helps the business to improve its poor performance.
• It helps to strengthen financial position of the company.
• It eliminates the negative synergy and facilitates strategic
investment.
BUSINESS SALE/DIVESTITURE:
Divestiture means selling or disposal of assets of the company or any
of its business undertakings/ divisions, usually for cash (or for a
combination of cash and debt) and not against equity shares to
achieve a desired objective, such as greater liquidity or reduced debt
burden. Divestiture is normally used to mobilize resources for core
business or businesses of the company by realizing value of non-core
business assets.
For example: XYZ Ltd. is the parent of a food company, a car
company, and a clothing company. If XYZ Ltd. wishes to go out of
the car business, it may divest the business by selling it to another
company, exchanging it for another asset, or closing the car company
Reasons for Divestitures -
• Huge divisional losses
• Continuous negative cash flows from a particular division
• Difficulty in integrating the business within the company
• Unable to meet the competition
• Lack of technological upgradations due to non-
affordability
• Lack of integration between the divisions
MODULE 2
 Introduction
A business may grow over time as the utility of its products
and services is recognized.
It may also grow through an inorganic process, symbolized
by an instantaneous expansion in work force, customers,
infrastructure resources and thereby an overall increase in
the revenues and profits of the entity.
Mergers and acquisitions are manifestations of an inorganic
growth process. While mergers can be defined to mean
unification of two players into a single entity, acquisitions
are situations where one player buys out the other to
combine the bought entity with itself.
It may be in form of a purchase, where one business buys
another or a management buy out, where the management
buys the business from its owners.
Further, de-mergers, i.e., division of a single entity into two
or more entities also require being recognized and treated on
par with mergers and acquisitions regime and accordingly
references below to mergers and acquisitions also is
intended to cover de-mergers (with the law & Rules as
framed duly catering to the same).
Process of Merger & Acquisition involves corporate
strategy, corporate finance and management.
It involves consolidation of companies i.e., business
combination, division and demerger of two or more
companies.
The merger and amalgamation requires various regulatory
approvals and procedures as enunciated in the Companies
Act, 2013.
Merger being a strategy, it has to be object oriented and it
dwells upon the concept of synergy, which means value of two
companies together will be more than of an individual
company.
Merger & Acquisition could be by way of business
purchase/share purchase agreement or by way of sanction of
Scheme of Arrangement through the court route.
In a sense, in the case of merger through a court route, once the
scheme is sanctioned by the court/tribunal after due process of
law and the scheme is filed with the Registrar of Companies, it
is irreversible; it carries the stamp of final approval by a
judicial authority and is acceptable to the public, shareholders,
stakeholders, registering authority.
Merger & Acquisition process is normally proceeded by
formulation of strategy, identification of cost benefit
analysis, carrying out due diligence, conducting valuation
and considering the aspects of stamp duty and other
applications.
Moreover, the integration issue after the merger exercise is
also to be taken care of.
Provisions of the Companies
Act, 2013
Chapter XV, comprising of sections 230 to 240 read
with the Companies (Compromises, Arrangements
and Amalgamations) Rules, 2016, deals with
Compromises, Arrangements and Amalgamations.
Section 230 - Power to compromise or make
arrangements with creditors and members
Section 230 lays down in detail the power of a company to
make compromise or arrangements with its creditors and
members. Under this section, a company can enter into a
compromise or arrangement with its creditors or its
members, or any class thereof.
Scope of Section 230
Section 230 deals with the rights of a company to enter into a
compromise or arrangement
(i) between itself and its creditors or any class of them; and
(ii) between itself and its members or any class of them.
The arrangement contemplated by the section includes a re-
organisation of the share capital of a company by consolidation of
its shares of different classes or by sub-division of its shares into
shares of different classes or by both these methods.
The section also applies to compromise or arrangement entered by
companies under winding-up.
Therefore, an arrangement under this section can take a company out
of winding-up.
Sub-section (1)–Application to the Tribunal for convening
meetings of members/creditors.
Where a company or a creditor or a member of the company proposes
a compromise or arrangement between it and its creditors or between it
and its members or with any class of the creditors or any class of
members, the company or the creditor or member, or where the
company is being wound-up, the liquidator may make an application
to the Tribunal.
On such application, the Tribunal may order a meeting of the creditors
or members or any class of them and such meetings shall be called,
held and conducted in such manner as the Tribunal may direct.
The key words and expressions under sub-section are
‘creditors’, ‘Tribunal’, ‘class of creditors or members’, ‘a
company which is being wound-up’, ‘liquidator’.
When a company is ordered to be wound-up, the liquidator is
appointed and once winding-up commences liquidator takes
charge of the company in all respects and therefore it is he who
could file any application of any compromise or arrangement in
the case of a company which is being wound-up.
A company which is being wound-up would mean a company
in respect of which the court has passed the winding-up order.
Sub-section (2)– Disclosures to the Tribunal by applicant
under sub-section 1:
Sub-section (2) provides that the company or any other
person, who makes an application as provided under sub-
section (1) shall disclose by affidavit to the Tribunal:
(a) all material facts relating to the company, such as the latest
financial position of the company, the latest auditor’s report
on the accounts of the company and the pendency of any
investigation or proceedings against the company;
(b) reduction of share capital of the company, if any, included
in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than
seventy-five percent of the secured creditors in value, including—
(i) a creditor’s responsibility statement in the prescribed form;
(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) report by the auditor that the fund requirements of the company after the
corporate debt restructuring as approved shall conform to the liquidity test
based upon the estimates provided to them by the Board;
(iv) where the company proposes to adopt the corporate debt restructuring
guidelines specified by the Reserve Bank of India, a statement to that effect;
and
(v) a valuation report in respect of the shares and the property and all assets,
tangible and intangible, movable and immovable, of the company by a
registered valuer.
Sub-section (3) – Notice of the meeting.
Notice of the meeting called in pursuance of the order of the tribunal shall
be sent to all the creditors or class of creditors and to all the members or
class of members and the debenture-holders of the company, individually
at the address registered with the company which shall be accompanied by:
1. a statement disclosing the details of the compromise or arrangement,
2. a copy of the valuation report, if any, and
3. explaining their effect on creditors, key managerial personnel, promoters
and non-promoter members, and the debenture holders and
4. the effect of the compromise or arrangement on any material interests of
the directors of the company or the debenture trustees, and
5. such other matters as may be prescribed:
Such notice and other documents shall also be placed on the
website of the company, if any, and in case of a listed
company, these documents shall be sent to the Securities and
Exchange Board and stock exchange where the securities of
the companies are listed, for placing on their website and shall
also be published in newspapers in such manner as may be
prescribed:
When the notice for the meeting is also issued by way of an
advertisement, it shall indicate the time within which copies
of the compromise or arrangement shall be made available to
the concerned persons free of charge from the registered
office of the company.
Sub-section (4) – Notice to provide for voting by
themselves or through proxy or through postal ballot.
Sub-section (4) states that a notice under sub-section(3) shall
provide that the persons to whom the notice is sent may vote
in the meeting either themselves or through proxies or by
postal ballot to the adoption of the compromise or
arrangement within one month from the date of receipt of
such notice. Provided that any objection to the compromise or
arrangement shall be made only by persons holding not less
than ten per cent. of the shareholding or having outstanding
debt amounting to not less than five per cent of the total
outstanding debt as per the latest audited financial statement.
Sub-section (5) – Notice to be sent to the regulators seeking their
representations.
Section 230 (5) states that a notice under sub-section (3) along with
all the documents in such form as may be prescribed shall also be
sent to the Central Government, the income-tax authorities, the
Reserve Bank of India, the Securities and Exchange Board, the
Registrar, the respective stock exchanges, the Official Liquidator, the
Competition Commission of India established under sub-section (1)
of section 7 of the Competition Act, 2002, if necessary, and such
other sectoral regulators or authorities which are likely to be affected
by the compromise or arrangement and shall require that
representations, if any, to be made by them shall be made within a
period of thirty days from the date of receipt of such notice, failing
which, it shall be presumed that they have no representations to
make on the proposals.
Sub-section (6): Approval and sanction of the scheme
Section 230 (6) states that when at a meeting held in pursuance of
sub-section (1), majority of persons representing three-fourths in
value of the creditors, or class of creditors or members or class of
members, as the case may be, voting in person or by proxy or by
postal ballot, agree to any compromise or arrangement and if such
compromise or arrangement is sanctioned by the Tribunal by an
order, the same shall be binding on the company, all the creditors,
or class of creditors or members or class of members, as the case
may be, or, in case of a company being wound-up, on the
liquidator appointed under this Act or under the Insolvency and
Bankruptcy Code, 2016, as the case may be and the contributories
of the company.
Sub-section (7): Order of the tribunal sanctioning the scheme to
provide for the certain matters
An order made by the Tribunal shall provide for all or any of the
following matters, namely:
a) where the compromise or arrangement provides for conversion of
preference shares into equity shares, such preference shareholders
shall be given an option to either obtain arrears of dividend in cash or
accept equity shares equal to the value of the dividend payable;
b) the protection of any class of creditors;
c) if the compromise or arrangement results in the variation of the
shareholders’ rights, it shall be given effect to under the provisions of
section 48;
d) if the compromise or arrangement is agreed to by the
creditors under sub-section (6), any proceedings pending
before the Board for Industrial and Financial Reconstruction
established under section 4 of the Sick Industrial Companies
(Special Provisions) Act,1985 shall abate;
e) such other matters including exit offer to dissenting
shareholders, if any, as are in the opinion of the Tribunal
necessary to effectively implement the terms of the
compromise or arrangement.
No compromise or arrangement shall be sanctioned by the
Tribunal unless a certificate by the company's auditor has
been filed with the Tribunal to the effect that the accounting
treatment, if any, proposed in the scheme of compromise or
arrangement is in conformity with the accounting standards
prescribed under section 133.
Sub-Section (8): The order of the Tribunal shall be filed
with the Registrar by the company within a period of
thirty days of the receipt of the order.
Sub-section (9): The Tribunal may dispense with calling
of meeting of creditors
Section 230 (9) states that the Tribunal may dispense with
calling of a meeting of creditor or class of creditors where
such creditors or class of creditors, having at least ninety
percent value, agree and confirm, by way of affidavit, to the
scheme of compromise or arrangement.
Sub-Section (10): Compromise in respect of buy back is to be
in compliance with section 68.
As per Section 230 (10), no compromise or arrangement in
respect of any buy-back of securities under this section shall be
sanctioned by the Tribunal unless such buy-back is in
accordance with the provisions of section 68.
Sub-Section (11):
Section 230(11) states that any compromise or arrangement may
include takeover offer made in such manner as may be
prescribed. In case of listed companies, takeover offer shall be as
per the regulations framed by the Securities and Exchange Board
Section 231 – Power of the Tribunal to enforce compromise or
arrangement
As per section 231(1) when the Tribunal makes an order under
section 230 sanctioning a compromise or an arrangement in respect
of a company, it—
(a) shall have power to supervise the implementation of the
compromise or arrangement; and
(b) may, at the time of making such order or at any time, thereafter,
give such directions in regard to any matter or make such
modifications in the compromise or arrangement as it may consider
necessary for the proper implementation of the compromise or
arrangement.
Sub-section (2) states that if the Tribunal is satisfied that the
compromise or arrangement sanctioned under section 230
cannot be implemented satisfactorily with or without
modifications, and the company is unable to pay its debts as
per the scheme, it may make an order for winding-up the
company and such an order shall be deemed to be an order
made under section 273.
Section 232 – Merger and amalgamation of companies
Sub-section (1): Tribunal’s power to call meeting of
creditors or members, with respect to merger or
amalgamation of companies.
Section 232(1) states that when an application is made to the
Tribunal under section 230 for the sanctioning of a
compromise or an arrangement proposed between a
company and any such persons as are mentioned in that
section, and it is shown to the Tribunal —
a) that the compromise or arrangement has been proposed for the
purposes of, or in connection with, a scheme for the reconstruction of
the company or companies involving merger or the amalgamation of
any two or more companies; and
b) that under the scheme, the whole or any part of the undertaking,
property or liabilities of any company (hereinafter referred to as the
transferor company) is required to be transferred to another company
(hereinafter referred to as the transferee company), or is proposed to
be divided among and transferred to two or more companies, the
Tribunal may on such application, order a meeting of the creditors or
class of creditors or the members or class of members, as the case
may be, to be called, held and conducted in such manner as the
Tribunal may direct and the provisions of sub-sections (3) to (6) of
section 230 shall apply mutatis mutandis.
Sub-section (2): Circulation of documents for
members/creditors meeting.
Section 232(2) states that when an order has been made by
the Tribunal under sub-section (1), merging companies or the
companies in respect of which a division is proposed, shall
also be required to circulate the following for the meeting so
ordered by the Tribunal, namely:
a) the draft of the proposed terms of the scheme drawn up
and adopted by the directors of the merging company;
b) confirmation that a copy of the draft scheme has been filed
with the Registrar;
c) a report adopted by the directors of the merging
companies explaining effect of compromise on each class of
shareholders, key managerial personnel, promoters and non-
promoter shareholders laying out in particular the share
exchange ratio, specifying any special valuation difficulties;
d) the report of the expert with regard to valuation, if any;
e) a supplementary accounting statement if the last annual
accounts of any of the merging company relate to a financial
year ending more than six months before the first meeting of
the company summoned for the purposes of approving the
scheme.
Sub-section (3): Sanctioning of scheme by Tribunal Section
232(3) states that the Tribunal, after satisfying itself that the
procedure specified in sub-sections (1) and (2) has been
complied with, may, by order, sanction the compromise or
arrangement or by a subsequent order, make provision for the
following matters, namely:—
a) the transfer to the transferee company of the whole or any
part of the undertaking, property or liabilities of the transferor
company from a date to be determined by the parties unless
the Tribunal, for reasons to be recorded by it in writing,
decides otherwise;
b) the allotment or appropriation by the transferee company
of any shares, debentures, policies or other like instruments
in the company which, under the compromise or
arrangement, are to be allotted or appropriated by that
company to or for any person:
No transferee company can hold shares in its own name or
under any trust. A transferee company shall not, as a result
of the compromise or arrangement, hold any shares in its
own name or in the name of any trust whether on its behalf
or on behalf of any of its subsidiary or associate companies
and any such shares shall be cancelled or extinguished;
c) the continuation by or against the transferee company of any
legal proceedings pending by or against any transferor company on
the date of transfer;
d) dissolution, without winding-up, of any transferor company;
e) the provision to be made for any persons who, within such time
and in such manner as the Tribunal directs, dissent from the
compromise or arrangement;
f) where share capital is held by any non-resident shareholder
under the foreign direct investment norms or guidelines specified
by the Central Government or in accordance with any law for the
time being in force, the allotment of shares of the transferee
company to such shareholder shall be in the manner specified in
the order;
g) the transfer of the employees of the transferor company to the
transferee company;
h) when the transferor company is a listed company and the transferee
company is an unlisted company,—
A) the transferee company shall remain an unlisted company until it
becomes a listed company;
B) if shareholders of the transferor company decide to opt out of the
transferee company, provision shall be made for payment of the value
of shares held by them and other benefits in accordance with a pre-
determined price formula or after a valuation is made, and the
arrangements under this provision may be made by the Tribunal: The
amount of payment or valuation under this clause for any share shall
not be less than what has been specified by the Securities and
Exchange Board under any regulations framed by it;
i) where the transferor company is dissolved, the fee, if any, paid
by the transferor company on its authorised capital shall be set-off
against any fees payable by the transferee company on its
authorised capital subsequent to the amalgamation; and
j) such incidental, consequential and supplemental matters as are
deemed necessary to secure that the merger or amalgamation is
fully and effectively carried out:
No compromise or arrangement shall be sanctioned by the
Tribunal unless a certificate by the company’s auditor has been
filed with the Tribunal to the effect that the accounting treatment,
if any, proposed in the scheme of compromise or arrangement is
in conformity with the accounting standards prescribed under
section 133.
Sub-section (4):
Transfer of property or liabilities
Sub-section (4) states that an order under this section
provides for the transfer of any property or liabilities, then,
by virtue of the order, that property shall be transferred to
the transferee company and the liabilities shall be transferred
to and become the liabilities of the transferee company and
any property may, if the order so directs, be freed from any
charge which shall by virtue of the compromise or
arrangement, cease to have effect.
Sub-section (5):
Certified copy of the order to be filed with the registrar.
Section 232(5) states that every company in relation to which
the order is made shall cause a certified copy of the order to
be filed with the Registrar for registration within thirty days
of the receipt of certified copy of the order.
Sub Section (6): Effective date of the scheme.
Section 232(6) states that the scheme under this section shall
clearly indicate an appointed date from which it shall be
effective, and the scheme shall be deemed to be effective from
such date and not at a date subsequent to the appointed date.
Sub-section (7): Annual statement certified by
CA/CS/CWA to be filed with Registrar every year until
the completion of the scheme.
Section 232(7) states that every company in relation to
which the order is made shall, until the completion of the
scheme, file a statement in such form and within such time
as may be prescribed with the Registrar every year duly
certified by a chartered accountant or a cost accountant or a
company secretary in practice indicating whether the
scheme is being complied with in accordance with the
orders of the Tribunal or not.
Sub-section (8): Punishment
Section 232(8) states that if a transferor company or a
transferee company contravenes the provisions of this
section, the transferor company or the transferee company,
as the case may be, shall be punishable with fine which shall
not be less than one lakh rupees but which may extend to
twenty-five lakh rupees and every officer of such transferor
or transferee company who is in default, shall be punishable
with imprisonment for a term which may extend to one year
or with fine which shall not be less than one lakh rupees but
which may extend to three lakh rupees, or with both.
Section 233 –Merger or amalgamation of certain
companies:
Section 233 prescribes simplified procedure for Merger or
amalgamation of
• two or more small companies, or
• between a holding company and its wholly-owned
subsidiary company, or
• such other class or classes of companies as maybe
prescribed;
Sub-section (1) Accordingly sub-section(1) of Section 233
states that notwithstanding the provisions of section 230 and
section 232, a scheme of merger or amalgamation may be
entered into between two or more small companies or
between a holding company and its wholly-owned
subsidiary company or such other class or classes of
companies as may be prescribed, subject to the following,
namely:—
a) a notice of the proposed scheme inviting objections or
suggestions, if any, from the Registrar and Official
Liquidators where registered office of the respective
companies are situated or persons affected by the scheme
within thirty days is issued by the transferor company or
companies and the transferee company;
b) the objections and suggestions received are considered by
the companies in their respective general meetings and the
scheme is approved by the respective members or class of
members at a general meeting holding at least ninety percent
of the total number of shares;
c) each of the companies involved in the merger files a
declaration of solvency, in the prescribed form, with the
Registrar of the place where the registered office of the
company is situated; and
d) the scheme is approved by majority representing nine-
tenths in value of the creditors or class of creditors of
respective companies indicated in a meeting convened by
the company by giving a notice of twenty-one days along
with the scheme to its creditors for the purpose or otherwise
approved in writing.
Sub-section (2): The sub-section states that the transferee
company shall file a copy of the scheme so approved in the
manner as may be prescribed, with the Central Government,
Registrar and the Official Liquidator where the registered
office of the company is situated.
Sub-section (3): Central Government to issue
confirmation order, where there are no objections or
suggestions from registrar or official liquidator.
Section 233(3) states that on the receipt of the scheme, if the
Registrar or the Official Liquidator has no objections or
suggestions to the scheme, the Central Government shall
register the same and issue a confirmation thereof to the
companies.
Sub-section (4): Objections if any by the registrar or
official liquidator to be communicated to the central
government.
Section 233(4) If the Registrar or Official Liquidator has any
objections or suggestions, he may communicate the same in
writing to the Central Government within a period of thirty
days. If no such communication is made, it shall be
presumed that he has no objection to the scheme
Sub-section (5): Application by Central Government to
the Tribunal.
Section 233(5) states that if the Central Government after
receiving the objections or suggestions or for any reason is
of the opinion that such a scheme is not in public interest or
in the interest of the creditors, it may file an application
before the Tribunal within a period of sixty days of the
receipt of the scheme under sub-section (2) stating its
objections and requesting that the Tribunal may consider the
scheme under section 232.
Sub-section (6): Tribunal’s action to Central
Government’s application
Section 233(6) states that on receipt of an application from
the Central Government or from any person, if the Tribunal,
for reasons to be recorded in writing, is of the opinion that
the scheme should be considered as per the procedure laid
down in section 232, the Tribunal may direct accordingly or
it may confirm the scheme by passing such order as it deems
fit: If the Central Government does not have any objection
to the scheme or it does not file any application under this
section before the Tribunal, it shall be deemed that it has no
objection to the scheme.
Sub-section (7): Registrar having jurisdiction over
transferee company has to be communicated
Section 233(7) states that a copy of the order under sub-
section (6) confirming the scheme shall be communicated to
the Registrar having jurisdiction over the transferee
company and the persons concerned and the Registrar shall
register the scheme and issue a confirmation thereof to the
companies and such confirmation shall be communicated to
the Registrars where transferor company or companies were
situated.
Sub-section (8): Effect of Registration of the scheme.
Sub-Section (8) states that the registration of the scheme
under sub-section (3) or sub-section (7) shall be deemed to
have the effect of dissolution of the transferor company
without process of winding up.
Sub-section (9)
This sub-section states that the registration of the scheme shall
have the following effects, namely:—
a) transfer of property or liabilities of the transferor company to the
transferee company so that the property becomes the property of
the transferee company and the liabilities become the liabilities of
the transferee company;
b) the charges, if any, on the property of the transferor company
shall be applicable and enforceable as if the charges were on the
property of the transferee company; c) legal proceedings by or
against the transferor company pending before any court of law
shall be continued by or against the transferee company; and
d) where the scheme provides for purchase of shares held by
the dissenting shareholders or settlement of debt due to
dissenting creditors, such amount, to the extent it is unpaid,
shall become the liability of the transferee company.
Sub-section (10): Transferee Company not to hold any
share in its own name or trust and all such shares are to be
cancelled or extinguished
Section 233(10) states that a transferee company shall not on
merger or amalgamation, hold any shares in its own name or in
the name of any trust either on its behalf or on behalf of any of
its subsidiary or associate company and all such shares shall be
cancelled or extinguished on the merger or amalgamation
Sub-section (11): Transferee Company to file an
application with Registrar along with the scheme
registered.
The transferee company shall file an application with the
Registrar along with the scheme registered, indicating the
revised authorised capital and pay the prescribed fees due on
revised capital. The fee, if any, paid by the transferor
company on its authorised capital prior to its merger or
amalgamation with the transferee company shall be set-off
against the fees payable by the transferee company on its
authorised capital enhanced by the merger or amalgamation.
Section 234: Merger or amalgamation of a company with
a foreign company
Section 234(1) states that the provisions of this Chapter XV of
the Companies Act, 2013 unless otherwise provided under
any other law for the time being in force, shall apply mutatis
mutandis to schemes of mergers and amalgamations between
companies registered under this Act and companies
incorporated in the jurisdictions of such countries as may be
notified from time to time by the Central Government. The
Central Government may make rules, in consultation with the
Reserve Bank of India, in connection with mergers and
amalgamations provided under this section.
Section 234(2) states that subject to the provisions of any other
law for the time being in force, a foreign company, may with the
prior approval of the Reserve Bank of India, merge into a
company registered under this Act or vice versa and the terms
and conditions of the scheme of merger may provide, among
other things, for the payment of consideration to the share
holders of the merging company in cash, or in Depository
Receipts, or partly in cash and partly in Depository Receipts, as
the case may be, as per the scheme to be drawn up for the
purpose.
For the purposes of sub-section(2), the expression “foreign
company” means any company or body corporate incorporated
outside India whether having a place of business in India or not.
Section 235: Power to acquire shares of shareholders
dissenting from scheme or contract approved by
majority
Section 235 of the Companies Act, 2013 prescribes the
manner of acquisition of shares of shareholders dissenting
from the scheme or contract approved by the majority
shareholders holding not less than nine tenth in value of the
shares, whose transfer is involved. It includes notice to
dissenting shareholders, application to dissenting
shareholders to tribunal, deposit of consideration received
by the transferor company in a separate bank account etc.
Section 236: Purchase of minority shareholding
Section 236 prescribes the manner of notification by the acquirer
(majority) to the company, offer to minority for buying their shares,
deposit an amount equal to the value of shares to be acquired, valuation
of shares by registered valuer, etc.
Section 237: Power of Central Government to provide for
amalgamation of companies in public interest
Section 237(1) states that when the Central Government is satisfied that
it is essential in the public interest that two or more companies should
amalgamate, the Central Government may, by order notified in the
Official Gazette, provide for the amalgamation of those companies into a
single company with such constitution, with such property, powers,
rights, interests, authorities and privileges, and with such liabilities,
duties and obligations, as may be specified in the order.
Continuation of legal proceedings:
Section 237(2) states that the order under sub-section (1)
may also provide for the continuation by or against the
transferee company of any legal proceedings pending by or
against any transfer or company and such consequential,
incidental and supplemental provisions as may, in the
opinion of the Central Government, be necessary to give
effect to the amalgamation.
Interest or rights of members, creditors, debenture holders not
to be affected.
As per Section 237(3), every member or creditor, including a
debenture holder, of each of the transferor companies before the
amalgamation shall have, as nearly as may be, the same interest in
or rights against the transferee company as he had in the company
of which he was originally a member or creditor, and in case the
interest or rights of such member or creditor in or against the
transferee company are less than his interest in or rights against
the original company, he shall be entitled to compensation to that
extent, which shall be assessed by such authority as may be
prescribed and every such assessment shall be published in the
Official Gazette, and the compensation so assessed shall be paid to
the member or creditor concerned by the transferee company.
Sub-section 4: Appeal to Tribunal
As per Section 237(4) any person aggrieved by any
assessment of compensation made by the prescribed
authority under sub-section (3) may, within a period of thirty
days from the date of publication of such assessment in the
Official Gazette, prefer an appeal to the Tribunal and
thereupon the assessment of the compensation shall be made
by the Tribunal.
Sub-section 5: Conditions for order
As per Section 237 (5) No order shall be made under this
section unless —
(a) a copy of the proposed order has been sent in draft to
each of the companies concerned;
(b) the time for preferring an appeal under sub-section (4)
has expired, or where any such appeal has been preferred,
the appeal has been finally disposed off; and
(c) the Central Government has considered, and made such
modifications, if any, in the draft order as it may deem fit in
the light of suggestions and objections which may be
received by it from any such company within such period as
the Central Government may fix in that behalf, not being
less than two months from the date on which the copy
aforesaid is received by that company, or from any class of
share holders therein, or from any creditors or any class of
creditors thereof.
Sub-section 6:
As per Section 237(6) the copies of every order made under
this section shall, as soon as may be after it has been made,
be laid before each House of Parliament.
Section 238: Registration of offer of schemes involving transfer of
shares
Section 238(1) states that in relation to every offer of a scheme or
contract involving the transfer of shares or any class of shares in the
transferor company to the transferee company under section 235, —
(a) every circular containing such offer and recommendation to the
members of the transferor company by its directors to accept such
offer shall be accompanied by such information and in such manner as
may be prescribed;
(b) every such offer shall contain a statement by or on behalf of the
transferee company, disclosing the steps it has taken to ensure that
necessary cash will be available; and
(c) every such circular shall be presented to the Registrar for
registration and no such circular shall be issued until it is so registered:
Provided that the Registrar may refuse, for reasons to be
recorded in writing, to register any such circular which does not
contain the information required to be given under clause (a) or
which sets out such information in a manner likely to give a
false impression and communicate such refusal to the parties
within thirty days of the application.
Section 238(2) states that an appeal shall lie to the Tribunal
against an order of the Registrar refusing to register any circular
under sub-section (1).
Section 238(3) states that the director who issues a circular
which has not been presented for registration and registered
under clause (c) of sub-section(1), shall be liable to a penalty of
one lakh rupees.
Section 239: Preservation of books and papers of
amalgamated companies
As per section 239, the books and papers of a company which
has been amalgamated with, or whose shares have been acquired
by, another company under this Chapter shall not be disposed of
without the prior permission of the Central Government and
before granting such permission, that Government may appoint a
person to examine the books and papers or any of them for the
purpose of ascertaining whether they contain any evidence of the
commission of an offence in connection with the promotion or
formation, or the management of the affairs, of the transferor
company or its amalgamation or the acquisition of its shares.
Section 240: Liability of officers in respect of offences
committed prior to merger, amalgamation, etc.
As per Section 240, notwithstanding anything in any other
law for the time being in force, the liability in respect of
offences committed under this Act by the officers in default,
of the transferor company prior to its merger, amalgamation
or acquisition shall continue after such merger,
amalgamation or acquisition.
 Interest of the Small
Investors in Mergers
INTRODUCTION
The fundamental principle defining operation of
shareholders democracy is that the rule of majority shall
prevail.
However, it is also necessary to ensure that this power of
the majority is placed within reasonable bounds and does
not result in oppression of the minority and mis-
management of the company.
The minority interests, therefore, have to be given a voice to
make their opinions known at the decision-making levels.
The law should provide for such a mechanism. If
necessary, in cases where minority has been unfairly
treated in violation of the law, the avenue to approach
an appropriate body for protecting their interests and
those of the company should be provided for.
The law must balance the need for effective decision
making on corporate matters on the basis of consensus
without permitting persons in control of the company,
i.e., the majority, to stifle action for redressal arising out
of their own wrongdoing.
 Minority and ‘Minority Interest’
under Companies Act
The term “minority” and “minority interest” are not clearly
defined in the Companies Act, 2013 or Rules made
thereunder.
However, in various provisions of the Act, members are
given various collective statutory rights which can be
exercised even if they are not in majority (i.e., holding more
than 50% of the numbers/shares/voting rights).
In another way, minority can be identified as those members
who are not in the control or management of the affairs of
the company.
The following are some of the provisions where minority
interest is recognized in the Act:
1. At present as per Section 244 of the Companies Act, 2013,
in case of a company having share capital, not less than 100
members or not less than 1/10th of total number of
members, whichever is less or any member or members
holding not less than 1/10th of issued share capital have the
right to apply to NCLT in case of oppression and
mismanagement. In case of companies not having share
capital, not less than 1/5th of total number of members have
the right to apply.
2. To reflect the interest of the “Minority”, a 10% criteria in
case of companies having share capital and a 20% criteria in
the case of other companies is provided for in the Act. To
help the Minority shareholders, proviso to Section 244(1) of
the Companies Act, 2013 empowers NCLT to allow
application by shareholders who are not otherwise eligible
(i.e., holding less than 10%-20% as aforesaid). This really
opens possibility of minority actions in deserving cases of
oppression and mismanagement.
3. In Section 235 of the Act, the dissenting shareholders
have been put at the limit of 10% of the value of the shares.
4. Remedy against oppression is available in section 241 (a)
of the Act. Oppression can be defined as conducting the
company’s affairs in a manner prejudicial to public interest
or in a manner oppressive to any member or members.
Remedy against Mis-management is available in Section
241(b) of the Act. Mismanagement can be defined as
conducting the affairs of the company in a manner
prejudicial to public interest or in a manner prejudicial to the
interests of the company.
5. In section 245 of the Act, provisions of Class action are
laid down. Under these provisions, minority members or
depositors may apply to NCLT on behalf of the members or
depositors, if they are of the opinion that the management or
conduct of the affairs of the Company are in a manner
prejudicial to the interest of the company or its members or
depositors. In this provision also the threshold of minority
action is in line with Section 244 of the Act as noted above.
Section 245 of the Act has broadened the scope for minority
actions in India in line with international practices.
 Rights of minority shareholders
during mergers/amalgamations/
takeovers
1. As per existing provisions of the Act, approval of High
Court (prior to 15th December 2016) /Tribunal (w.e.f. 15th
December 2016) is required in case of corporate
restructuring (which, inter-alia, includes,
mergers/amalgamations etc.) by a company. The Scheme is
also required to be approved by shareholders, before it is
filed with the NCLT. The scheme is circulated to all
shareholders along with statutory notice (Form No. CAA-2)
of the Tribunal convened meetings and the explanatory
statement u/s 230(3) of the Act read with Rule 6 of
Companies (Compromise, Arrangement and Amalgamation)
Rules, 2016 for approving the scheme by shareholders.
2. As per proviso to Section 230(4) of the Act, it is provided
that any objection to the compromise or arrangement shall be
made by persons holding 10% or more of the shareholding or
having 5% or more of the total outstanding debt as per latest
audited financial statement. Thus, shareholders holding less
than 10% or more of the shareholding are not entitled to object
to the scheme as matter of statutory right. There are other built-
in safeguards in the matter of approval of the scheme of
compromise and arrangements. The notice convening the
meetings and also the notice of hearing of the petition (in Form
CAA-2) is required to be published in the newspaper as per the
Companies (Compromise, Arrangement and Amalgamation)
Rules, 2016. The notice is also required to be given to various
statutory authorities, sectoral regulators etc.
Though there may not be any express protection to any
dissenting minority shareholders to file their objections as a
matter of right on this issue, the Tribunal, while approving the
scheme, may follow judicious approach more particularly in
view of the publication of the public notices about the
proposed scheme in the newspapers. Any interested person
(including a minority shareholder) may appear before the
NCLT. There have been, however, occasions when
shareholders holding miniscule shareholdings, have made
frivolous objections against the scheme, just with the objective
of stalling or deferring the implementation of the scheme. The
courts have, on a number of occasions, overruled their
objections. In view of this, proviso to Section 230(4) of the Act
has put some limit for the objectors.
3. In case of Takeovers, as per SEBI (Substantial Acquisition of Shares
and Takeover) Regulations, SEBI has powers to appoint investigating
officer to undertake investigation, in case complaints are received from
the investors, intermediaries or any other person on any matter having
a bearing on the allegations of substantial acquisition of shares and
takeovers. SEBI may also carry out such investigation suo moto upon
its own knowledge or information about any breach of these
regulations. Under section 235 of the Act, a transferee company, which
has acquired 90% shares of a transferor company through a scheme or
contract, is entitled to acquire shares of remaining 10% shareholders.
Dissenting shareholders have been provided with an opportunity to
approach Tribunal. For this purpose, there is no threshold applicable
i.e., even a single dissentient shareholding holding one share may also
approach Tribunal. In such case, further acquisition of shares by the
transferee company will be subject to the outcome of the decision of
the NCLT.
 Protection of minority
Interest
Section 232(3)(e) authorizes the Tribunal to make provision
for any person who dissent from the scheme. Thus, the
Tribunal must play a very vital role.
It is not only a supervisory role but also a pragmatic role
which requires the forming of an independent and informed
judgement as regards the feasibility or proper working of the
scheme and making suitable modifications in the scheme
and issuing appropriate directions with that end in view.
 The Tribunal considers Minority
interest while approving the scheme of
merger
As per existing provisions of the Act, approval of Tribunal is
required in case of corporate restructuring (which, inter-alia,
includes, mergers/amalgamations etc.) by a company.
The Scheme is also required to be approved by shareholders,
before it is filed with the Tribunal.
The scheme is circulated to all shareholders along with
statutory notice of the court convened meeting and the
explanatory statement u/s 230(3) read with Rule 6 of The
Companies (Compromise, Arrangement and Amalgamation)
Rules, 2016 of the Act for approving the scheme by
shareholders
The notice of hearing of petition (in form CAA-2) is also
required to be published in the newspaper. As per proviso to
Section 230(4) of the Act, members holding 10% or more of
the shareholding are entitle to file their objection before
NCLT as a matter of right.
Any interested person (including a minority shareholder) may
appear before the Tribunal. There have been, however,
occasions when shareholders holding miniscule
shareholdings, have made frivolous objections against the
scheme, just with the objective of stalling or deferring the
implementation of the scheme. The courts have, on a number
of occasions, overruled their objections.
Majority approval cannot deprive minority from raising
objections.
Approval of majority of shareholders is not an automatic
rejection of objections of minority shareholders. The court
has to apply its mind to dissent, or objections raised by
minority shareholders. The majority view will prevail if
there is nothing cogent or valid In the objections.
In case of Consolidated Coffee Limited(1999)
Fair and reasonable Scheme
made in good faith
Any scheme which is fair and reasonable and made in good
faith will be sanctioned if it could reasonably be supported by
sensible people to be for the benefit to each class of the
members or creditors concerned.
In Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772 : (1960) 30
Com Cases 536 (Ch D) it was held, inter alia, that although it
might be possible to find faults in a scheme that would not be
sufficient ground to reject it.
It was further held that in order to merit rejection, a scheme
must be obviously unfair, patently unfair, unfair to the
meanest intelligence. It cannot be said that no scheme can be
effective to bind a dissenting shareholder unless it complies
with the basic requirements to the extent of 100 per cent.
It is the consistent view of the Courts that no scheme can be said to be fool-
proof and it is possible to find faults in a particular scheme but that by itself is
not enough to warrant a dismissal of the petition for sanction of the scheme.
If the court is satisfied that the scheme is fair and reasonable and in the interests
of the general body of shareholders, the court will not make any provision in
favour of the dissentients.
For such a provision is not a sine qua non to sanctioning a fair and reasonable
scheme, unless any special case is made out which warrants the exercise of
court's discretion in favour of the dissentients. Re, Kami Cement & Industrial
Co. Ltd., (1937) 7 Com Cases 348, 364-65 (Bom). The Courts have gone further
to say that a scheme must be held to be unfair to the meanest intelligence before
it can be rejected. It must be affirmatively proved to the satisfaction of the Court
that the scheme is unfair before the scheme can be rejected by the Court.
English, Scottish & Australian Chartered Bank, Re, (1893) 3 Chancery 385.
 COMPETITION ASPECTS
OF COMBINATIONS
Antitrust law seeks to make enterprises compete fairly. It has
had a serious effect on business practices and the
organization of U.S. industry.
Premised on the belief that free trade benefits the economy,
businesses, and consumers alike, the law forbids several
types of restraints of trade and monopolization.
These cover areas such as agreements between or among
competitors, contractual arrangements between sellers and
buyers, the pursuit or maintenance of monopoly power, and
mergers.
The Sherman Anti-Trust Act of 1980 is the origin of Anti-trust/Competition
Law in many countries.
This legislation was the result of intense public opposition to the
concentration of economic power in large corporations and in combinations
of business concerns that had been taking place in the U.S. in the decades
following the Civil War.
The Sherman Antitrust Act was the first measure enacted by the U.S.
Congress. The Sherman Antitrust Act, was based on the constitutional power
of Congress to regulate interstate commerce.
In 1914, US Congress passed two measures that provided additional support
for the Sherman Antitrust Act. One was the Clayton Antitrust Act, which
elaborated on the general provisions of the Sherman Act and specified
several illegal practices that either contributed to or resulted from
monopolization.
It explicitly outlawed commercial practices such as price
discrimination (i.e., charging different prices to different
customers), the buying out of competitors and interlocking boards
of directors.
The other was the establishment of the Federal Trade Commission,
an agency with the power to investigate possible violations of
antitrust laws and to issue orders forbidding unfair competitive
practices.
Gradually, competition law came to be recognized as one of the
key pillars of a market economy.
This recognition led to enactment of competition law in many
countries including developing countries.
Based on the recommendations of the Raghavan Committee,
the Competition Bill, 2000 was introduced in Parliament
which was later enacted as the Competition Act, 2002.
PREAMBLE OF THE ACT:
An Act to provide for, keeping in view of the economic
development of the country, the establishment of a
Commission to prevent practices having adverse effect on
competition, to promote and sustain competition in markets,
to protect the interest of consumers and to ensure freedom of
trade carried on by other participants in market, in India, and
for matters connected therewith or incidental thereto.
 Combination under
Competition Act, 2002
Combination means acquisition of control, shares, voting rights
or assets, acquisition of control by a person over an enterprise
where such person has control over another enterprise engaged
in competing business, and mergers and amalgamations between
or amongst enterprises when the combining parties exceed the
thresholds set in the Act.
The thresholds are unambiguously specified in the Act in terms
of assets or turnover in India and abroad.
Entering into a combination which causes or is likely to cause an
appreciable adverse effect on competition within the relevant
market in India is prohibited and such combination would be
void
 Combinations – Thresholds
On March 4, 2016, the Central Government issued
notifications pertaining to the statutory thresholds for the
purposes of “combinations” under Section 5 of the
Competition Act, 2002 (“Act”).
1. Increase in thresholds: Pursuant to Notification
No.S.O.675(E) dated March 4, 2016, the value of assets and
the value of turnover has been enhanced by 100% for the
purposes of Section 5 of the Act. Accordingly, the revised
thresholds for notification to the Competition Commission
of India (“Commission”) are:
THRESHOLDS FOR
FILING NOTICE
2. Increase in thresholds of De Minimis Exemption:
Pursuant to Notification No.S.O.674(E) dated March 4,
2016, acquisitions where enterprises whose control, shares,
voting rights or assets are being acquired have assets of not
more than Rs.350 crore in India or turnover of not more than
Rs.1000 crore in India, are exempt from Section 5 of the Act
for a period of 5 years. Accordingly, the revised thresholds
for availing of the De Minimis exemption for acquisitions
are:
Regulation of Combinations
Section 6 of the Competition Act prohibits any person or
enterprise from entering a combination which causes or is
likely to cause an appreciable adverse effect on competition
within the relevant market in India and if such a
combination is formed, it shall be void.
 Notice to the Commission disclosing
Details of the Proposed Combination
Section 6(2) envisages that any person or enterprise, who or
which proposes to enter any combination, shall give a notice to
the Commission disclosing details of the proposed combination,
in the form prescribed and submit the form together with the fee
prescribed by regulations.
Such intimation should be submitted within 30 days of:
(a) approval of the proposal relating to merger or amalgamation,
referred to in section 5(c), by the board of directors of the
enterprise concerned with such merger or amalgamation, as the
case may be;
(b) execution of any agreement or other document for acquisition
referred to in section 5(a) or acquiring of control referred to in
section 5(b).
The Competition Commission of India (CCI) has been
empowered to deal with such notice in accordance with
provisions of sections 29, 30 and 31 of the Act.
Section 29 prescribes procedure for investigation of
combinations. Section 30 empowers the Commission to
determine whether the disclosure made to it under section 6(2)
is correct and whether the combination has, or is likely to have,
an appreciable adverse effect on the competition.
Section 31 provides that the Commission may allow the
combination if it will not have any appreciable adverse effect
on competition or pass an order that the combination shall not
take effect, if in its opinion, such a combination has or is likely
to have an appreciable adverse effect on competition.
Exemptions:
The provisions of section 6 do not apply to share subscription or
financing facility or any acquisition, by a public financial institution,
foreign institutional investor, bank or venture capital fund, pursuant to
any covenant of a loan agreement or investment agreement.
This exemption appears to have been provided in the Act to facilitate
raising of funds by an enterprise during its normal business.
Under section 6(5), the public financial institution, foreign
institutional investor, bank or venture capital fund, are required to file
in prescribed form, details of the control, the circumstances for
exercise of such control and the consequences of default arising out of
loan agreement or investment agreement, within seven days from the
date of such acquisition or entering into such agreement.
As per the explanation to section 6(5):
(a) “foreign institutional investor” has the same meaning as
assigned to it in clause (a) of the Explanation to section
115AD of the Income-tax Act, 1961;
(b) “venture capital fund” has the same meaning as assigned
to it in clause (b) of the Explanation to clause (23FB) of
section 10 of the Income-tax Act, 1961.
It may be noted that under the law, the combinations are
only regulated whereas anti-competitive agreements and
abuse of dominance are prohibited.
Inquiry into combination by
the Commission
The Commission under section 20 of the Competition Act
may inquire into the appreciable adverse effect caused or
likely to be caused on competition in India because of
combination either upon its own knowledge or information
(suo moto) or upon receipt of notice under section 6(2)
relating to acquisition referred to in section 5(a) or acquiring
of control referred to in section 5(b) or merger or
amalgamation referred to in section 5(c) of the Act.
It has also been provided that an enquiry shall be initiated by
the Commission within one year from the date on which
such combination has taken effect.
Thus, the law has provided a time limit within which suo
moto inquiry into combinations can be initiated.
This provision dispels the fear of enquiry into combination
between merging entities after the expiry of stipulated
period.
On receipt of the notice under section 6(2) from the person or an
enterprise which proposes to enter into a combination, it is
mandatory for the Commission to inquire whether the
combination referred to in that notice, has caused or is likely to
cause an appreciable adverse effect on competition in India.
The Commission shall have due regard to all or any of the
factors for the purposes of determining whether the combination
would have the effect of or is likely to have an appreciable
adverse effect on competition in the relevant market, namely:
(a) actual and potential level of competition through imports in
the market;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the
parties to the combination being able to significantly and
sustainably increase prices or profit margins;
(f) extent of effective competition likely to sustain in a
market;
(g) extent to which substitutes are available or likely to be
available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a
combination, individually and as a combination;
(i) likelihood that the combination would result in the removal of a
vigorous and effective competition or competitors in the market;
(j) nature and extent of vertical integration in the market;
(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic
development, by any combination having or likely to have appreciable
adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact
of the combination, if any.
The above yardsticks are to be taken into account
irrespective of the fact whether an inquiry is instituted, on
receipt of notice under section 6(2) or upon its own
knowledge.
The scope of assessment of adverse effect on competition
will be confined to the “relevant market”.
Most of the facts enumerated in section 20(4) are external to
an enterprise
It is noteworthy that sub clause (n) of Section 20(4) requires
to invoke principles of a “balancing”.
It requires the Commission to evaluate whether the benefits
of the combination outweigh the adverse impact of the
combination, if any.
In other words, if the benefits of the combination outweigh
the adverse effect of the combination, the Commission will
approve the combination.
Conversely, the Commission may declare such a
combination as void
 Procedure for investigation
of Combination
The procedure for investigation by the Commission has been
stipulated under section 29 of the Act. It involves the
following stages:
(i) The Commission first has to form a prima facie opinion
that a combination is likely to cause or has caused an
appreciable adverse effect on competition within the
relevant market in India. Further, when the Commission has
come to such a conclusion then it shall proceed to issue a
notice to the parties to the combination, calling upon them to
show cause why an investigation in respect of such
combination should not be conducted.
(ii) After receipt of the response of the parties to the combination,
the Commission may call for the report of the Director General.
(iii) When pursuant to response of parties or on receipt of report of
the Director General whichever is later, the Commission is, prima
facie, of the opinion that the Combination is likely to cause an
appreciable adverse effect on competition in relevant market, it
shall, within seven working days from the date of receipt of the
response of the parties to the combinations or the receipt of the
report from Director General under section 29 (1A) whichever is
later, direct the parties to the combination to publish within ten
working days, the details of the combination, in such manner as it
thinks appropriate so as to bring to the information of public and
persons likely to be affected by such combination.
(iv) The Commission may invite any person affected or
likely to be affected by the said combination, to file his
written objections within fifteen working days of the
publishing of the public notice, with the Commission for its
consideration.
(v) The Commission may, within fifteen working days of the
filing of written objections, call for such additional or other
information as it deem fit from the parties to the said
combination and the information shall be furnished by the
parties above referred within fifteen days from the expiry of
the period notified by the Commission.
(vi) After receipt of all the information and within 45 days from
expiry of period for filing further information, the Commission
shall proceed to deal with the case, in accordance with
provisions contained in section 31 of the Act.
Thus, the provisions of section 29 provides for a specified
timetable within which the parties to the combination or parties
likely to be affected by the combination are required to submit
the information or further information to the Commission to
ensure prompt and timely conduct of the investigation. It further
imposes on Commission a time limit of 45 working days from
the receipt of additional or other information called for by it
under sub-section (4) of section 29 for dealing with the case of
investigation into a combination, which may have an adverse
effect of the competition
 Inquiry into disclosures
under section 6(2)
Section 6(2) casts an obligation on any person or enterprise, who
or which proposes to enter into combination, to give notice to
the Commission, in the form as may be specified, and the fee
which may be determined, by regulations, disclosing the details
of the proposed combination within thirty working days of:
(i) Approval of the proposal relating to merger or amalgamation
by the board of directors of the enterprises concerned with such
merger or amalgamation;
(ii) Execution of any agreement or other document for
acquisition referred to in section 5(a) or acquiring of control
referred to in section 5(b).
The section 6(2A) envisages that no combination shall come
into effect until 210 days have passed from the day on which
notice has been given to Commission or the Commission
has passed orders, whichever is earlier.
Upon receipt of such notice, the Commission shall examine
such notice and form its prima facie opinion as to whether
the combination has, or is likely to have, an appreciable
adverse effect on the competition in the relevant market in
India.
 Orders of Commission on
certain combinations
The Commission, after consideration of the relevant facts
and circumstances of the case under investigation by it
under section 28 or 30 and assessing the effect of any
combination on the relevant market in India, may pass any
of the written orders indicated herein below.
Where the Commission concludes that any combination
does not, or is not likely to, have an appreciable adverse
effect on the Competition in relevant market in India, it may,
approve that Combination.
(i) Where the Commission is of the opinion that the
combination has or is likely to have an adverse effect on
competition, it shall direct that the combination shall not
take effect.
(ii) Where the Commission is of the opinion that adverse
effect which has been caused or is likely to be caused on
competition can be eliminated by modifying such
combination then it shall direct the parties to such
combination to carry out necessary modifications to the
combination.
(iii) The parties accepting the proposed modification shall
carry out such modification within the period specified by the
Commission.
(iv) Where the parties have accepted the modification, but fail
to carry out such modification within the period specified by
the Commission, such combination shall be deemed to have
an appreciable adverse effect on competition and shall be
dealt with by the Commission in accordance with the
provisions of the Act.
(v) Where the parties to the Combination do not accept the
proposed modification such parties may within 30 days of
modification proposed by the Commission, submit
amendment to the modification proposed by the Commission.
(vi) Where the Commission agrees with the amendment
submitted by the parties, it shall, by an order approve the
combination.
(vii) Where the Commission does not accept the amendment,
parties shall be allowed a further period of 30 days for
accepting the amendment proposed by the Commission.
(viii) Where the parties to the combination fail to accept the
modification within thirty days, then it shall be deemed that
the combination has an appreciable adverse effect on
competition and will be dealt with in accordance with the
provisions of the Act
(ix) Where Commission directs under section 31(2) that the
combination shall not take effect or it has, or is likely to
have an appreciable adverse effect, it may order that,
(a) the acquisition referred to in section 5(a); or
(b) the acquiring of control referred to in section 5(b); or
(c) the merger or the amalgamation referred to in section
5(c) shall not be given effect to by the parities.
As per proviso the Commission may, if it considers
appropriate, frame a scheme to implement its order in regard
to the above matters under section 31(10).
(x) A deeming provision has been introduced by section
31(11). It provides that, if the Commission does not, on
expiry of a period of 210 days from the date of filing of
notice under section 6(2) pass an order or issue any direction
in accordance with the provisions of section 29(1) or section
29(2) or section 29(7), the combination shall be deemed to
have been approved by the Commission. In reckoning the
period of 210 days, the period of thirty days specified in
section 29(6) and further period of thirty working days
specified in section 29(8) granted by Commission shall be
excluded.
(xi) Further more where extension of time is granted on the
request of parties the period of two hundred ten days shall
be reckoned after deducting the extended time granted at the
request of the parties.
(xii) Where the Commission has ordered that a combination
is void, as it has an appreciable adverse effect on
competition, the acquisition or acquiring of control or
merger or amalgamation referred to in section 5, shall be
dealt with by other concerned authorities under any other
law for the time being in force as if such acquisition or
acquiring of control or merger or amalgamation had not
taken place and the parties to the combination shall be dealt
with accordingly.
(xiii) Section 29(14) makes it clear that nothing contained in
Chapter IV of the Act shall affect any proceeding initiated or
may be initiated under any other law for the time being in
force. It implies that provisions of this Act are in addition to
and not in derogation of provisions of other Acts.
Thus, approval under one law does not make out a case for
approval under another law.
 Extra Territorial
Jurisdiction of Commission
Section 32 extends the jurisdiction of Competition Commission of India to
inquire and pass orders in accordance with the provisions of the Act into
an agreement or dominant position or combination, which is likely to have,
an appreciable adverse effect on competition in relevant market in India,
notwithstanding that,
(a) an agreement referred to in section 3 has been entered into outside
India; or
(b) any party to such agreement is outside India; or
(c) any enterprise abusing the dominant position is outside India; or
(d) a combination has taken place outside India; or
(e) any party to combination is outside India; or
(f) any other matter or practice or action arising out of such agreement or
dominant position or combination is outside India.
The above clearly demonstrate that acts taking place outside
India but influencing competition in India will be subject to
the jurisdiction of Commission.
The Competition Commission of India will have jurisdiction
even if both the parties to an agreement are outside India but
only if the agreement, dominant position or combination
entered into by them has an appreciable adverse effect on
competition in the relevant market of India.
Power to impose penalty for non-furnishing
of information on Combination
Section 43A provides that if any person or enterprise who
fails to give notice to the Commission under sub-section (2)
of section 6, the Commission shall impose on such person or
enterprise a penalty which may extend to one per cent of the
total turnover or the assets, whichever is higher, of such a
combination.
Thus, failure to file notice of combination falling under
section 5 attracts deterrent penalty.
The Competition Commission of India (Procedure
regarding the transaction of business relating to
combinations) Amendment Regulation, 2015
The Competition Commission of India (“CCI”) vide a
Notification (published in the Gazette of India) on July 01,
2015, (“the amendment”) published the “The Competition
Commission of India (Procedure in regard to the transaction
of business relating to combinations) Amendment
Regulation, 2015” , amending the existing Competition
Commission of India (Procedure in regard to the transaction
of business relating to combinations)Regulations,
2011(“Combination Regulations”).
To bring in more firmness, scope of the term “other
document” has now been limited to a communication
conveying the intention to make an acquisition to a Statutory
Authority.
• Any person duly authorised by the board of directors can
sign the notice. The number of copies to be filed with the
commission has also been reduced.
• CCI has also revised Form I required to be filed for
notifying combination to the effect that notes of the forms
will be provided for guidance to the notifying parties
regarding the information to be filed in the notice.
• Furthermore, to provide more transparency regarding
review process, amendment provides that summary of the
combination under review will be published on the CCI
website. With this the stakeholders will get an opportunity to
submit their comments to CCI regarding the proposed
combination.
• CCI has also modified the timelines for prima facie
opinion on appreciable adverse effects from 30 Calendar
Days to 30 Working days.
 Amalgamation of Banking
and Government Companies
Introduction
The Banking Regulation Act, 1949 is the important legislation with regard
to licensing of commercial banks, their operation, supervision and
restructuring and winding up.
As per this Act, the provisions of applicable company legislation would
apply to the commercial banks which are incorporated as companies to the
extent the same not superseded in the Banking Regulation Act, 1949 and
the rules and regulations framed thereunder. Section 5(c) of the Banking
Regulation Act, 1949 defines a “banking company” as any company
which transacts the business of banking in India.
The term “banking” too has been given the definition in the said Act vide
section 5(i)(b) which states that “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order
or otherwise.
In the Companies Act, 2013, vide sub-section (9) of Section
2, the term “Banking Company” has been defined. It states
that the terms “banking company” means a banking
company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949.
 Master Direction issued by the Reserve Bank of
India for amalgamation of Banking company inter
se and for amalgamation of Non-Banking
Financial Company with a Banking company
The Reserve Bank of India issues master circulars and directions
every year with a view to consolidate their instructions from time to
time.
The Reserve Bank of India announces various policy decisions by
circulars and wherever legal prescription is required, the same is
issued by way of directions and notifications.
Since there are frequent amendments to such directions and
notifications, the Reserve Bank issues master circulars once a year on
various topics and also has now started issuing master directions
consolidating various instructions with regard to the topics so that
anyone interested in them may access the latest master
circulars/directions and only check if any further circular have been
issued subsequent to the date of such circulars/directions.
One such master direction bearing no. RBI/DBR/2015-16/22
dated the 21st April, 2016 is the latest one with regard to
amalgamation of private sector banks.
This direction repeals the earlier guidelines contained in
DBOD.No.PSBS.BC.89/16.13.100/2004-05 dated the 11th
May, 2005 on guidelines for merger/amalgamation of
Private sector banks.
This master direction would apply to amalgamation between
two banking Companies and also for amalgamation of a Non
Banking Financial Company (NBFC) with a Banking
Company.
The principles contained in this direction would also be applicable
for public sector banks. For amalgamation of two banking
companies, the authority solely vests with the Reserve Bank of
India in terms of section 44A of the Banking Regulation Act, 1949.
In case a NBFC is to be merged with a banking Company, the
provisions applicable under Companies Act, 2013 sections 232-234
would apply.
The scheme of amalgamation would have to be approved by the
National Company Law Tribunal.
Wherever NCLT is involved, the normal provisions under
Companies Act, 2013 and the rules thereunder would apply.
 AMALGAMATION BETWEEN
TWO BANKING COMPANIES
In terms of paragraph 6 of the said master direction, the
decision of amalgamation is required to be approved by the
Board of the Bank concerned with a two thirds majority and
not just those present and voting.
This means that if the Board has said 12 directors, then 8
directors must be present and vote in favour of the
amalgamation.
The Banks shall also have to bear in mind the deed of
covenants as recommended by the Ganguly Working Group
on Corporate Governance.
The draft scheme of amalgamation is also required to be
approved by the Board of Directors with the same majority.
As stated in paragraph 7, in terms of section 44A of the
Banking Regulation Act, 1949, the draft scheme of
amalgamation shall be approved by the shareholders of each
banking company by a resolution passed by a majority in
number representing two thirds in value of the shareholders,
present in person or by proxy at a meeting called for the
purpose.
The ceiling on voting rights under section 12(2) i.e. ten per
cent of maximum vote irrespective of holding by the
shareholder would apply in the context of section 44A when
there is a poll to determine whether the resolution has been
passed by requisite majority
As per paragraph 9, the Boards should give particular attention
to the following:
• The values at which the assets, liabilities and the reserves of
the amalgamated company are proposed to be incorporated
into the books of the amalgamating company and whether
such incorporation will result in a revaluation of assets
upwards or credit being taken for unrealized gains.
• Whether due diligence exercise has been undertaken in
respect of the amalgamated company.
• The nature of the consideration, which, the amalgamating
company will pay to the shareholders of the amalgamated
company.
• Whether the swap ratio has been determined by
independent valuers having required competence and
experience and whether in the opinion of the Board such
swap ratio is fair and proper.
• The shareholding pattern in the two banking companies
and whether as a result of the amalgamation and the swap
ratio, the shareholding of any individual, entity or group in
the amalgamating company will be violative of the Reserve
Bank guidelines or require its prior approval.
• The impact of the amalgamation on the profitability and the
capital adequacy ratio of the amalgamating company.
• The changes which are proposed to be made in the
composition of the Board of Directors of the amalgamating
banking company, consequent upon the amalgamation and
whether the resultant composition of the Board will be in
conformity with the Reserve Bank guidelines in that behalf.
As per paragraph 11, while submitting the application the
companies should submit to the Reserve Bank the information and
documents as contained in the Schedule to the Directions. The
information/documents to be submitted are as under:
1. Draft scheme of amalgamation as placed before the
shareholders of the respective banking companies for approval.
2. Copies of the notices of every meeting of the shareholders
called for such approval together with newspaper cuttings
evidencing that notices of the meetings were published in
newspapers at least once a week for three consecutive weeks in
two newspapers circulating in the locality or localities in which
the registered offices of the banking companies are situated and
that one of the newspapers was in a language commonly
understood in the locality or localities.
3. Certificates signed by each of the officers presiding at the
meeting of shareholders certifying the following:
(a) a copy of the resolution passed at the meeting;
(b) the number of shareholders present at the meeting in
person or by proxy;
(c) the number of shareholders who voted in favour of the
resolution and the aggregate number of shares held by them;
(d) the number of shareholders who voted against the
resolution and the aggregate number of shares held by them;
(e) the number of shareholders whose votes were declared as invalid
and the aggregate number of shares held by them;
(f) the names and ledger folios of the shareholders who voted against
the resolution and the number of shares held by each such shareholder;
(g) the names and designations of the scrutineers appointed for
counting the votes at the meeting together with certificates from such
scrutineers confirming the information given in items (c) to (f) above;
(h) the name of shareholders who have given notice in writing to the
Presiding Officer that they dissented from the scheme of
amalgamation together with the number of shares held by each of
them.
4. Certificates from the concerned officers of the banking companies
giving names of shareholders who have given notice in writing at or
prior to the meeting to the banking company that they dissented
from the scheme of amalgamation together with the number of
shares held by each of them.
5. The names, addresses and occupations of the Directors of the
amalgamating banking company as proposed to be reconstituted
after the amalgamation and indicating how the composition will be
in compliance with Reserve Bank regulations.
6. The details of the proposed Chief Executive Officer of the
amalgamating banking company after the amalgamation.
7. Copies of the reports of the valuers appointed for the
determination of the swap ratios.
 Entitlement of dissenting
Shareholders
In terms of paragraph 12 of the Directions, a dissenting
shareholder is entitled in the event of the scheme being
sanctioned by the Reserve Bank, to claim within 3 months
from the date of sanction, from the banking company
concerned, in respect of the shares held by him in that
company their value as determined by the Reserve Bank
when sanctioning the scheme and such determination by the
Reserve Bank as to the value of the shares to be paid to the
dissenting shareholders shall be final for all purposes.
To enable the Reserve Bank to determine such value, the
amalgamated banking company should submit the
following:-
(a) A report on the valuation of the share of the amalgamated
company made for this purpose by the valuers appointed for
the determination of the swap ratio
(b) Detailed computation of such valuation
(c) Where the shares of the amalgamated company are quoted on
the stock exchange:-
(i) Details of the monthly high and low of the quotation on the
exchange where the shares are most widely traded together with
number of shares traded during the six months immediately
preceding the date on which the scheme of amalgamation is
approved by the Boards.
(ii) The quoted price of the share at close on each of the fourteen
days immediately preceding the date on which the scheme of
amalgamation is approved by the Boards.
(d) Such other information and explanations as the Reserve Bank
may require.
 Approval by Reserve Bank
of India
— If the scheme of amalgamation is approved by the
requisite majority of shareholders in accordance with the
provisions of this section, it shall be submitted to the RBI
(Reserve Bank of India) for its sanction [section 44A(4)].
— The RBI may sanction a scheme by an order in writing
[section 44A(4)].
— A scheme sanctioned by the RBI shall be binding on the
banking companies concerned and also on all the
shareholders thereof [section 44A(4)].
— An order sanctioning a Scheme of Amalgamation, passed
by the RBI under section 44A(4) shall be conclusive
evidence that all the requirements of this section relating to
amalgamation have been complied with [section 44A(6C)].
— A copy of the said order certified in writing by an officer
of the RBI to be a true copy of such order and a copy of the
scheme certified in the like manner to be a true copy thereof
shall, in all legal proceedings (whether in appeal or
otherwise) be admitted as evidence to the same extent as the
original order and the original scheme [section 44A(6C)].
 Transfer of property
— On the sanctioning of a scheme of amalgamation by the RBI,
the property of the amalgamated banking company, i.e. the
transferor company, shall, by virtue of the order of sanction, be
transferred to and vest in the transferee company. No other or
further document will be necessary for effecting the transfer and
vesting of the property from the transferor company to the
transferee company The borrowal accounts in the transferor
banking company would be intact transferred to the transferee
banking company. [section 44A(6)].
— Similarly, the liabilities of the transferor company shall, by
virtue of the said order, be transferred to, and become the liabilities
of the transferee company [section 44A(6)]. The depositors of the
transferor bank shall be entitled to get the balances lying in their
account from the transferee bank branches.
 Dissolution of transferor
company
— Where a scheme of amalgamation is sanctioned by the
RBI, the RBI may, by a further order in writing, direct that on
the date specified in the order, the amalgamated banking
company i.e., the transferor company, shall stand dissolved
and such direction shall take effect notwithstanding anything
to the contrary contained in any other law [section 44A(6A)].
— A copy of the order directing dissolution of the
amalgamated banking company shall be forwarded by the
RBI to the office of the Registrar of companies at which it has
been registered. On receipt of such order, the Registrar shall
strike off the name of the company. [section 44A(6B)]
In terms of section 44A(7), provisions of section 44A would
not affect the power of the Central Government to provide
for amalgamation of two or more banking companies under
section 396 of the Companies Act, 1956. In the Companies
Act, 2013, the corresponding section is section 237
 AMALGAMATION OF A NON-
BANKING FINANCIAL COMPANY
WITH A BANKING COMPANY
In the past, some of the Non-Banking Financial Companies
have been merged with the commercial banks with the
approval Reserve Bank of India and further approval of the
High Courts.
The erstwhile Industrial Credit and Investment Corporation of
India Limited which was one of the Development Financial
Institutions merged with ICICI Bank Limited.
Now since as per the Companies Act, 2013, the jurisdiction has
shifted from High Courts to the National Company Law
Tribunal, the consequent approval of the merger of NBFC with
a Banking Company would be obtained from the National
Company Law Tribunal in terms of Companies (Compromises,
Arrangements and Amalgamation) Rules, 2016.
As per paragraphs 15 and 16 of the master direction, while
according approval to the scheme, the Board of the Banking
Company shall give consideration to the matters listed in
paragraph 9 referred to above.
In addition, the Board of the Banking Company shall examine
whether –
(a) the NBFC has violated/is likely to violate any of the
RBI/SEBI norms and if so, shall ensure that these norms are
complied with before the scheme of amalgamation is approved;
(b) The NBFC has complied with KYC (Know your customer)
norms for all the accounts, which will become accounts of the
banking company after amalgamation;
(c) If the NBFC has availed of credit facilities from banks/FIs,
whether the loan agreements mandate the NBFC to seek consent
of the bank/FI concerned for the proposed merger/amalgamation.
As per paragraph 17 of the master direction, to enable the
Reserve Bank of India to consider the application for approval,
the banking company shall furnish to the Reserve Bank of India,
information as specified in the schedule to the direction (except
certificate in respect of names of shareholders who gave notice
in writing at or prior to the meeting to the NBFC that they
dissented from the scheme of amalgamation) and also the
information and documents relating to the valuation along with
its computation and the quoted price details.
The aforesaid direction and its terms will also apply in
respect of amalgamation of a banking company with a Non-
Banking Financial Company.
 PRIOR APPROVAL OF RBI IN CASES OF
ACQUISITION OR TRANSFER OF CONTROL
OF DEPOSIT TAKING NBFC’s
As per, Non-Banking Financial Companies (Deposit
Accepting) (Approval of Acquisition or Transfer of Control)
Directions, 2009 (As amended by Notification No. DNBS.
(PD) 275/GM(AM) - 2014 dated May 26, 2014), any
takeover or acquisition of control of a deposit taking NBFC,
whether by acquisition of shares or otherwise, or any
merger/amalgamation of a deposit taking NBFC with
another entity, or any merger/amalgamation of an entity with
a deposit taking NBFC, shall require prior written approval
of Reserve Bank of India.
The Reserve Bank of India may, if it considers necessary for
avoiding any hardship or for any other just and sufficient
reason, exempt any NBFC or class of NBFCs, from all or
any of the provisions of these Directions either generally or
for any specified period, subject to such conditions as the
Reserve Bank of India may impose.
It is also clarified that approval shall be taken before
approaching the Court or the National Company Law
Tribunal (after Companies Act, 2013) in the following
situations:
(i) any takeover or acquisition of control of an NBFC,
whether by acquisition of shares or otherwise;
(ii) any merger/amalgamation of an NBFC with another
entity or any merger/amalgamation of an entity with an
NBFC that would give the acquirer / another entity control
of the NBFC;
(iii) any merger/amalgamation of an NBFC with another
entity or any merger/amalgamation of an entity with an
NBFC which would result in acquisition/transfer of
shareholding in excess of 10 percent of the paid-up capital
of the NBFC.
 PRIOR APPROVAL OF THE RESERVE BANK OF
INDIA FOR ACQUISITION AND CHANGE IN
CONTROL OF MANAGEMENT OF NON-BANKING
FINANCIAL COMPANY
Whenever, there is a change in management of any Non
Banking Financial Company (Core Investment Company,
Deposit Accepting Non Banking Financial Company, Non
Deposit Accepting Financial Company) by transfer of shares or
change in control of management of Non Banking Financial
Company, the prior approval for change in management shall be
obtained from the Reserve Bank of India.
In other words, any restructuring proposal of Non Banking
Financial Companies requires the clearance of the Reserve
Bank of India in terms of the directions/guidelines/circulars
issued by the Reserve Bank of India. Change in control can
arise by a change in the shareholding of the companies which
hold shares in the Non Banking Financial Companies.
Whenever there is change in the shareholding pattern of
ultimate holding company, in effect the control of Non-
Banking Financial Company would also change and thus the
approval of the Reserve Bank of India is necessary.
In cases of Systemically Important Core Investment
Companies, directions/guidelines to the above effect could be
found in chapter VI of Section III of the Master direction
dated the 25th August 2016.
The following are the instances provided in the said master
direction:
(a) any takeover or acquisition of control of CIC, which may or
may not result in change of management;
(b) any change in the shareholding of CIC, including progressive
increases over time, which results in acquisition / transfer of
shareholding of 26 per cent or more of the paid-up equity capital
of the CIC. Provided that, prior approval shall not be required in
case of any shareholding going beyond 26 per cent due to
buyback of shares / reduction in capital where it has approval of
a competent Court. The same is to be reported to the Bank not
later than one month from its occurrence;
(c) any change in the management of the CIC which results in
change in more than 30 per cent of the directors, excluding
independent directors.
Provided that, prior approval shall not be required in case of
directors who get re-elected on retirement by rotation.
PROCEDURE FOR MERGER AND AMALGAMATION
RELATED TO GOVERNMENT COMPANIES (vide
MCA circular dated 20.04.2011 in the context of Section
233 of the Companies Act, 2013)
The Ministry of Corporate Affairs (MCA) has been dealing
with the amalgamation of Government Companies in the
Public Interest under section 396 of the Companies Act, 1956
by following the procedures prescribed under Companies
(Court) Rules, 1959 which are applicable to amalgamation
under Sections 391-394 of the Companies Act, 1956.
The Government announced vide circular dated the 20th April
2011 Without prejudice to the generality of the circular that it
has been decided that, in appropriate cases, simpler
procedures shall be adopted for the amalgamation of
Government Companies under section 396 of the Companies
Act, 1956.
However, in the new Companies Act of 2013, the same provisions
are contained in section 233.
This section has been implemented with effect from 15.12.2016 and
the relevant rules are found in Rule 25 of the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016.
The Government has not announced any fresh policy with regard to
following the procedure of simplified merger utilizing the provision
of section 237 of the Companies Act, 2013.
However, it is expected that the Government will follow the same
procedure for merger / amalgamation of Government Companies as
announced earlier as per circular dated 20.4.2011 and the salient
features and conditions of the scheme for amalgamation of
Government Companies are given below:-
(1) (a) Every Central Government Company which is
applying to the Central Government for amalgamation with
any other Government Company or Companies under the
simplified prescribed procedure, shall obtain approval of the
Cabinet i.e. Union Council of Ministers to the effect that the
proposed amalgamation is essential in the ‘public interest’. (b)
In the case of State Government Companies, the approval of
the State Council of Ministers would be required.
(c) Where both Central and State Government Companies are
involved, approval of both State Cabinet(s) and Central
Cabinet shall be necessary.
(2) (i) A Government Company may, by a resolution passed
at its general meeting decide to amalgamate with any other
Government Company, which agrees to such transfer by a
resolution passed at its general meeting;
(ii) Any two or more Government Companies may, by a
resolution passed at any general meetings of its Members,
decide to amalgamate and with a new Government
Company.
(3) Every resolution of a Government Company under this
section shall be passed at its general meeting by members
holding 100% of the voting power and such resolution shall
contain all particulars of the assets and liabilities of
amalgamating Government Companies.
(4) Before passing a resolution under this section, the
Government Company shall give notice thereof of not less
than 30 days in writing together with a copy of the proposed
resolution to all the Members and Creditors.
(5) A resolution passed by a Government Company under this
section shall not take effect until (i) the assent of all creditors
has been obtained, or (ii) the assent of 90% of the creditors by
value has been received and the company certifies that there is
no objection from any other creditor.
(6) The resolutions passed by the Transferor and Transferee
Companies along with written confirmation of the Cabinet
decision shall then be submitted to the Central Government
which shall, if it is satisfied that all the requirements of
Section 396 and the circular issued by MCA on this behalf
have been fulfilled, order by notification in the Gazette that
the said amalgamation shall take effect.
(7) The order of the Central Government shall provide:-
(a) for the transfer to the Transferee Company of the whole or any part
of the undertaking, property or liabilities of any transferor company
(b) that the amalgamation of companies under the foregoing sub-
sections shall not in any manner whatsoever affect the pre-existing
rights or obligations and any legal proceedings that might have been
continued or commenced by or against any erstwhile company before
the amalgamation, may be continued or commenced by, or against, the
concerned resulting company, or transferee company, as the case may
be.
(c) for such incidental, consequential and supplemental matters as are
necessary to secure that the amalgamation shall be fully and
effectively carried out
(8) The Cabinet decision referred to in para (1) above may
precede or follow the passing of the resolution referred to in
para (2).
(9) When an order has been passed by the Central
Government under this section, it shall be a sufficient
conveyance to vest the assets and liabilities in the transferee.
(10) Where one government company is amalgamated with
another government company, under these provisions, the
registration of the first-mentioned Company i.e. transferor
company, shall stand cancelled and that Company shall be
deemed to have been dissolved and shall cease to exist
forthwith as a corporate body.
(11) Where two or more Government Companies are
amalgamated into a new Government Company in accordance
with these provisions and the Government Company so formed
is duly registered by the Registrar, the registration of each of
the amalgamating companies shall stand cancelled forthwith on
such registration and each of the Companies shall thereupon
cease to exist as a corporate body.
(12) The amalgamation of companies under the foregoing
sub-sections shall not in any manner whatsoever affect the
pre-existing rights or obligations, and any legal proceedings
that might have been continued or commenced by or against
any erstwhile company before the amalgamation, may be
continued or commenced by, or against, the concerned
resulting company, or transferee company, as the case may
be.
(13) The Registrar shall strike off the names of every
Government Company deemed to have been dissolved under
sub-sections (10) to (11). (14) Government companies are
not prevented from applying for amalgamation before the
Central Government under Sections 391-394 of the
Companies Act.